Monday, October 31, 2011

Monday Morning Musings

The market is lower this morning after some reverberations spreading through the market after MF Global has moved into a bankruptcy filing. It looks like the trading firm took on some big sovereign debt risks that ultimately turned out bad. Whenever a financial firm is liquidated it can rattle the market, but this should in no way be compared to what happened to Lehman Bros.

In foreign markets, officials in Japan have intervened in the Yen to try to push the currently lower after its recent runup to multi-decade highs. The lower yen is boosting the dollar and weighing on commodity markets. Oil prices are lower near $92.15 and gold prices are also down to $1725.

Earnings season will begin to slow this week, but it was another good showing for corporate profits. It will be interesting to see how 2012 estimates are adjusted in the coming weeks after forward guidance seems to have come in better than many analysts were bracing for.

The 10-year yield is lower to 2.21% after reaching as high as 2.40% last week; as for the VIX, it is +11% higher right now to 27.25, but still nicely below that 30 level.

Trading comment: After last week's outsized rally, capping off an enormous month for the markets, some profit taking today is not surprising. The chart below shows that the S&P 500 rallied all the way up to its overhead 200-day moving average, which is a natural area of resistance. This should be a battleground in the near-term. I would expect there to be some consolidation around this level for a bit. But if the market is able to get back above it, that would continue to put pressure on investors to put risk back on and chase stocks higher.

Thursday, October 27, 2011

Do You Believe The European Solution Will Work?

The markets are flying this morning on the news that the EU leaders have agreed to a plan to deal with the debt crisis in the region. Although this deal was for the most part well telegraphed by the market, I think there was still some skepticism that the various parties would agree on all of the various pieces.

As it has been announced, the negotiations on the Greek debt agreed on a 50% haircut, the EFSF stability fund is planned to be able to leverage up to $1.4 trillion, and the banks in Europe will be recapitalized. Of course, there is a lot of skepticism as to how the whole thing will actually be implemented and if it will work long-term, but those aren't today's issues.

Financials here in the U.S. are leading the early action, with the sector fully 4% higher, as the concerns about exposure to European banks dissipates. Corporate earnings have continued to come in better than expected, and investment managers seem to be scrambling to cover short positions and add long exposure as performance anxiety sets in.

Additionally, Q3 GDP came in above expectations at +2.5%. That is both well above last quarter's figure and also makes the debate about recession more of a 2012 issue as opposed to the imminent economic collapse some where predicting.

Asian markets were up sharply overnight, and Europe is nicely higher this morning. It is also a good sign to see CDS prices dropping in Europe. The euro is also higher vs. the dollar, which is boosting commodities. Oil prices are all the way up near $93, gold is up a bit to $1727, and silver and copper are rallying nicely as well.

The 10-year yield has broken above its recent trading range and is at 2.29%; as for the VIX, it fell all the way down to the 25 level, and is currently -13% lower on the day to 25.92.

Trading comment: I admit it hurts not having more long exposure during this record rally we have seen since the Oct. 4th lows. I am glad we didn't press our shorts or add to hedges as we felt a bounce was certainly in order after investor sentiment had reached bearish extremes. The question is what to do now? With earnings holding up, the economy slow but steady, and Europe less bad now that plans are in place, I think everyone will be in dip buying mode. I want to look for stocks that reported good earnings and can play catch-up with the averages, as well as looking for new leadership. The SPX is at resistance at its overhead 200-day average near 1275, so I do expect some consolidation in the markets first, but probably not all that much.

Wednesday, October 26, 2011

Is Recession Being Priced Off The Table?

The market opened higher this morning, but quickly turned tail and traded into negative territory. Earnings reports have been mostly positive, with a few negative reactions in the associated stocks. And optimism still seems somewhat lofty that EU leaders will emerge from this summit with some concrete solutions.

In economic news, durable goods for September slid 0.8%, but actually rose +1.7% ex-transportation. That's a fairly good number. Also, new home sales for September also rose more than expected by 5.7%. Recent economic data has not been nearly as soft as the market had been expecting, and it seems that a few weeks ago recession was being fully priced into this market but now is definitely coming into question and at least partly explains the lift we have seen in stock prices.

In earnings news, we are seeing positive action in names like PNRA, ESRX, FFIV, and MHS to name a few. Negative reactions include AGN, LMT, F, and of course AMZN which missed its numbers and is taking it on the chin.

We should hear this morning from EU leaders about the details of their summit. The market is expecting something near a 50% haircut on Greek debt, and word that the EFSF bailout fund can be leveraged up somehow to at least $1 trillion. I don't think we are going to get a firm figure on the size of bank recapitalizations. Investors have been saying that the bank recap figure needs to exceed $100 billion. So depending on how much details we get, we will see if sentiment in the market has become too bullish. I would also not be surprised to see them say that more details will be given in November ahead of the G20 meeting.

The euro is higher today at the expense of the dollar. Commodities are mixed. Oil prices are lower near $91.20, while gold prices have broken out over the $1700 level and are currently around $1718.

The 10-year yield is slightly higher to 2.13%; and the VIX is also higher and still stubbornly above that 30 level (currently 32.68). We still need to see this come down.

Trading comment: Tough juncture as we are somewhat held hostage to political decisions out of Europe. But with solid earnings reports coming in, and economic data this isn't as bad as feared, I still feel like underinvested portfolio managers will look to put money to work and buy dips in the near-term. Barring another shoe to drop in Europe, I would look to add to those stocks that recently reported good earnings and are beginning to break out.


Tuesday, October 25, 2011

Earnings Reactions A Mixed Bag Today

The market is lower in early trading, which shouldn't be much of a surprise given the outsized rally we have seen since the early October lows. There are reports coming out now that leaders in Europe are having some difficulty agreeing on some components of the proposed plan, and we are supposed to hear tomorrow what they have come up with.

Earnings reports continue to roll in, and the reactions in stocks have been a mixed bag this morning.

On the positive side, stocks that are seeing a bounce include: NUS, NOV, COH, BP, UA, COLM, and ILMN.

On the negative side, stocks dropping on earnings reports include: ITW, X, UPS, DB, TROW, CMI, X, and the poster child NFLX. But the most talked about downside guidance is coming from MMM which expects slower growth in 2012 and talked about specific weakness in Europe.

In economic news, the Consumer Confidence number for October dropped more than expected (no surprise) to 39.8 from 45.4 in the prior month. Also, the Case-Shiller Housing Price Index fell -3.8% in August.

Commodities continue to rally, with oil prices now all the way back to $94, and gold inching higher to $1685.

The 10-year yield has eased back to 2.16%; and the VIX has bounced 5% back above the 30 level to 30.75 currently. This is still an elevated level, and really needs to get back down into the 20s before we can expect a noticeable drop in the big market swings of late.

Trading comment: Investors are certainly feeling better after the last week of up days in the market. I sense that a lot of portfolio managers remain underinvested, and will be looking to add to stocks on a pullback. The wildcard of course is that we are still being held hostage to political decisions coming out of Europe about how they are dealing with this debt crisis. But unless there is another big shoe to drop in Europe, I think the market has pretty much priced in a lot of the issues for the near-term, and a continued unwind of investor pessimism should provide some support to the market.

Monday, October 24, 2011

Monday Morning Musings

Asian markets surged overnight on optimism that European officials are getting serious enough to come up with large sums aimed at stemming the debt crisis. No official details have been released yet, and there is another meeting taking place this week. But the market seems to be breathing a sigh of relief that they have again successfully kicked the can down the road.

Europe isn't up as much as I would have thought, but is still higher on the day. Economic data there was slightly weak in terms of PMI manufacturing and services readings that were lower in October than September, and also below the key 50 level marking contraction.

Caterpillar (CAT) released better-than-expected earnings this morning, and its stock is up nicely. There were also some M&A items with Cigna (CI) purchasing HealthSpring (HS) and Oracle (ORCL) buying RightNow Tech (RNOW), both for healthy premiums. All sectors are higher so far, led by consumer discretionary and industrials.

The dollar is slightly lower and most commodities are higher. Oil prices are up near $89.90, and gold prices are higher to $1565. Copper is also surging for a second day, up 7% currently.

The 10-year yield is higher to 2.21%; and the VIX is back below the 30 level, down -5% today to 29.66.

Trading comment: The market is overbought short-term, but you have to wonder how much performance anxiety is setting in given how much the markets have rallied since their early October lows. Stories abound that hedge funds are very underweight equities, and you could easily see that push stocks higher as managers chase performance. I know how they feel. Those index etf hedges we own are beginning to be a drag on portfolios, and we will need to reassess their usefulness soon.

Friday, October 21, 2011

Optimism Running High In Europe Ahead of Big Weekend

The market rallied right at the open after European markets showed signs of optimism that this weekend's European Summit would provide some answers to the debt crisis in the region. There hasn't really been any new comments. In fact, there was a headline that the "situation in Greece has taken a turn for the worse". One has to wonder if expectations have gotten ahead of themselves.

The enthusiasm sure didn't show up in Shanghai overnight. China's market was down for a 5th straight session, and fell to a fresh 2.5-year low. Don't they know the troika is about to solve all our problems?

Earnings reports have been mostly positive also last night and this morning. On the positive side are CMG, MCD (new all-time high), SNDK, and COF. On the negative side is APKT. And on the side of just okay, but not big reactions are SLB, VZ, MSFT, and GE.

The dollar is lower today and commodities are bouncing back. Copper is surging +5%, oil prices are above $88, and gold is higher near $1636.

The 10-year yield is back to the 2.20% level; and the VIX is down -7% this morning, but still at very elevated levels at 32.31.

Trading comment: Some of today's positive open may have been exacerbated by options expiration today. But technically, the S&P 500 has broken above its 8/31 highs at 1230. So for now we have broken out of the trading range to the upside. This is a good sign, but with the market up for nearly 4 weeks straight I think we could get a little pullback next week. Of course, a LOT depends on the news out of Europe. There is a summit over the weekend, and I believe a second summit around Wednesday. We could be setting up for a 'buy the rumor, sell the news' type of reaction also. Overall, if you're looking at adding to longs I think you can wait for a pullback.

long MCD, SH

Thursday, October 20, 2011

Wall Street All-Stars

I'm going to give all my Facebook friends and twitter followers a free six month subscription to Simply go sign up on and then shoot an email letting us know you subscribed to and we'll rebate you the $49 monthly fee each and every month for the first six months -- that's worth $300.

The European See-Saw

The market has been up recently on hopes that EU officials are getting their act together to move in a cohesive way and tackle the sovereign debt issues. Now we are getting some news blurbs that officials are having difficulty holding discussions on the EFSF and that there will be no decision on leveraging the fund this weekend.

The disappointment out of Europe seems to be trumping the positive economic reports from this morning like the big improvement in the Philly Fed Index to 8.7 from -17.5 last month. That's a big improvement, and will embolden calls that we are not going to experience a recession. I still think the odds are 50/50.

In earnings news, a few disappointing reactions in the likes of AXP, EBAY, and WYNN. On the positive side, see RVBD and PM.

The dollar is roughly flat today, but most commodities are lower. Oil prices have pulled back to $85.60, and gold prices are lower near $1617. Copper prices are plunging today as well.

The 10-year yield is hovering near 2.14%, and has been steadier in recent days than it has been in weeks. As for the VIX, it continues to climb and is now +6% higher back to 36.43. It is just above its 50-day overhead resistance, so this is an interesting juncture to watch.

Trading comment: The SPX is still holding above the 1200 level, which is short-term support (1190-1200). Bulls are hoping that we can continue to build a base around these levels before a successful push through SPX 1230. A break of SPX 1190 would likely spell another trip to lower levels of the recent trading range. Tough to gauge, as the market is very news driven by each headline out of Europe. We are staying defensive and maintaining our etf hedges.

long SH, PM

Wednesday, October 19, 2011

Earnings Reports Mostly Positive

The market is mixed in early trading, with Apple's results weighing on the Nasdaq, but the other major indexes pulling into positive territory.

AAPL dipped below the $400 level this morning, but is holding above there as of this post. The company missed EPS estimates for the first time since 2004. But they also raised guidance for next quarter, which is an equally rare occurrence for the company. And despite the weak iPhone number, gross margins were very solid.

I think for a company that has executed as flawlessly as Apple, investors should be willing to give them the benefit of the doubt and see if it was just a one-quarter blip. I expect them to have a very strong fall quarter, and am not selling any of our shares at this juncture.

Other strong stock reactions to earnings reports include ISRG, INTC, and ABT to name a few. Despite a few outliers, I think the net reactions to earnings season thus far have been fairly positive and I'm interested to see how S&P profit projections hold up once we get through the rest of the reports.

Asian markets were higher overnight, and Europe is higher this morning. The tone in Europe is improved despite Moody's downgrading Spain's debt rating. This wasn't a big surprise, but it is interesting to see that CDS spreads in Europe are improved today.

The dollar is flattish today, and commodities are mixed. Oil prices are higher again to $89.40 and gold prices are up slightly near $1657.

The 10-year yield is higher this morning near 2.18%; and the VIX remains interesting in that it cannot get below that 30 level folks are watching. Today it is actually higher to 32.66. Those sustained elevated levels in the VIX mean that traders are still expecting more swings in the market.

Trading comment: The market recouped Friday's losses yesterday and then some. The price action certainly feels good, and the indexes have indeed held above their 50-day averages thus far. Earnings season remains a wild card for individual stocks, but those companies that report good earnings I think can be bought for more upside in Q4. The market may be overbought in the short-term, but there is still considerable bearish sentiment that has built up and could help offer support under this market.

long AAPL

Monday, October 17, 2011

Monday Morning Musings

The markets are lower in early trading following last week's outsized 6% rally. That was the best weekly showing in more than two years. So it's normal to see a pullback following such strong price action. What the bulls hope for is just some quiet consolidation, without too much distribution.

Earnings season continues to heat up. This morning Citi (C) and Wells Fargo (WFC) both reported earnings, with the former beating estimates but the latter coming up a little shy. WFC is down 5% on its miss, and weighing on the financial sector. Halliburton (HAL) also beat estimates, but it looks like some serious profit taking there after a nice run into its earnings report. Apple (AAPL) reports this week, and is breaking out to new all-time highs ahead of its report.

Asian markets were higher overnight, and Europe was higher this morning after a G20 meeting this weekend. Leaders were pressed to come up with some sort of resolution within a week. I'm glad to see they're getting serious, but I am a little wary that expectations may be getting ahead of themselves.

The dollar is higher this morning, while commodities are mixed. Oil prices have eased back slightly to $86.40, while gold prices are firm near $1686.

The 10-year is lower today at 2.18%; and the VIX has really spiked higher already this morning, up nearly 13% back to the 31.85 level. This is an interesting development after last week's drop in the VIX below the 30 level. I think it shows traders are still jittery.

Trading comment: This is a tough juncture to consider new long positions right here. First you have the big rally from last week that will likely see some consolidation at the least, as well as profit taking. You also have earnings reports to deal with. And the action in WFC and HAL show the action following earnings reports can be unpredictable. That said, I expect AAPL to have a positive reaction to what I think will be very strong earnings again.


Friday, October 14, 2011

Financials Lag Early Rally

The markets are higher again in early trading on the heels of improved sentiment in Europe and a blowout earnings report from Google (GOOG).

Treasury Secretary Geithner made a lot of comments about Europe and tried to instill some confidence. He said they will continue to pressure Euro leaders to act decisively, and also said that the IMF has considerable resources that have yet to be deployed. That hints at his relationship with Christine Lagard, who is in Geithner's camp that more needs to be done.

The positive action in Europe this morning bucked the weakness in Asian markets overnight, and also ignored the downgrade of Spanish debt by Fitch.

In the U.S., stocks are rallying following Europe strength and the strong results from GOOG. Additionally, the retail sales report from September came in stronger-than-expected at +1.1%.

The financials are the biggest laggards this morning after Fitch placed several large financials on its Negative Watch list.

The dollar is weaker so far as the euro bounces, which is boosting commodities. Oil prices are higher to $86.40, while gold prices are trying to lift above $1675.

The 10-year yield continues to bounce, now back to 2.25%. And lo and behold but the VIX has finally broken below that psychological 30 level, although just barely. It is currently trading near 29.80 after getting as low as 28.25 after the open.

Trading comment: The price action has been solid all week, but the leadership in the market is lagging. I just don't see a lot of quality growth stocks breaking out. So I have yet to get a lot more bullish, and at this point am still in the camp that this is an oversold market rally that is normal after seeing investor sentiment reach extreme bearish levels. I could be wrong, but it would take continued constructive action in the market combined with some real tangible solutions out of Europe that I have yet to see. At this point there is a lot more talk than action going on across the pond.

long GOOG, SKF

Thursday, October 13, 2011

Market Overbought And At Resistance

The market is lower in early trading after a very nice rally. People often like to look at how much the market bounced from its recent lows. The SPX traded down to 1075 last week and bounced as high as 1220. That makes for a solid 13% bounce. Although if you were good enough to buy those lows and sold the highs yesterday, I have a job for you at our shop.

Bulls were hoping for some good news from JPM this morning, and they were able to top consensus estimates. But the cautious tone from management is not helping the stock, which is currently -5% lower and weighing on the financial sector which is the biggest laggard this morning.

Tech is bucking the weakness and the NDX is just barely positive as of this post. Google (GOOG) shares are higher going into tonight's earnings report. I'm sure GOOG will be able to post a little upside, but the stock reaction will be any ones guess. Also, GOOG management sometimes spends money on non-core things, so we will have to see how tight they were with their expenses. That's one thing that bothers me a bit about their management.

Asian markets were higher overnight, but Europe is down this morning. The euro is also lower while the dollar is higher. That is weighing on the commodity index. Oil prices have fallen back to $84, while gold prices are also lower around $1661.

The 10-year yield got a big bounce yesterday, but is giving some back today trading near 2.15%. As for the VIX, it almost got below the 30 level yesterday, but then bounced higher and is currently up +4% today to 32.54.

Trading comment: After being up big the last 6 out of 7 days, the market is short-term overbought and in need of at least some consolidation. Also, the major indexes have run into their former resistance levels near SPX 1220 and Nazz 2600. For the bulls, two things need to occur from here. The indexes need to hold above their 50-day averages, and these major support levels need to be broken. That could signal more upside is possible. But don't forget the list of stocks breaking out is not exactly bountiful. It is mostly utilities and defensive type stocks, not your typical quality growth names. So take the constructive action with a grain of salt, imo.

long GOOG, JPM

Wednesday, October 12, 2011

Earnings Season Starts On A Positive Note

The markets are higher again in early trading. If the market closes positive today, it would be the 6th day of gains in the last 7 sessions. For its part, the S&P 500 is running into resistance levels around the 1220 area that have halted the last few rallies.

Asia was mixed overnight, with some floods in Thailand that closed factories. But China was able to bounce +3.1%. Europe is higher this morning on optimism that Slovakia will pass the EFSF plan after it was voted down yesterday.

The euro is also getting a bounce on the news, pressuring the dollar. Commodities are higher across the board, led by copper (+3.5%). Gold prices are rallying back to $1680, while oil prices are roughly flat near $85.75.

In earnings news, although Alcoa (AA) reported a miss its stock is only down slightly. But Pepsico (PEP) and Infosys (INFY) both reported solid results and their stocks are up nicely. INFY's earnings is also boosting one of our holdings that I like best in the space, Cognizant Tech (CTSH). From this point, earnings season will continue to heat up, but at least its getting off to a solid start.

The 10-year yield is also getting a nice lift higher as recession fears are moving to the back burner, at least for the time being. Today the yield is all the way back to 2.21%.

As for the VIX, it is down -7.7% currently and knocking on the door - or I should say the floor - of that 30 level that I have been talking about. A break below this level would be a good sign for the bulls.

Trading comment: With the market rallying 6 of the last 7 days, we are no longer oversold and are short-term overbought. So I don't want to chase anything here, and I think it is likely we will see some consolidation in the near-term. The key for the major indexes will be that they hold their 50-day averages on any pullback. Those 50-day averages have been acting as resistance for the last few months, and if we can convert that resistance into support it would be another bullish sign for the market.

long CTSH

Tuesday, October 11, 2011

Bond Yields Lift From Very Low Levels

The market opened under a bit of profit taking this morning, but has reversed its early losses and is trading higher for the time being.

Asian markets joined the party and rallied overnight, led by Hong Kong. Interestingly, China lagged again and was only able to muster a 0.1% gain. Europe is lower this morning after a decision by the Troika to give Greece its next tranche of aid. Investors in the region feel that this will do little fix the longer-term problems of the country. As for news, we are waiting to here if the EFSF is ratified in Slovakia which is voting on it now.

Our financial sector is awaiting details from the Volker Rule, which is currently under a comment period. Banks stocks are mostly higher today, although tech stocks are leading the early action.

The dollar is getting a little bounce this morning, while most commodities are lower. Oil prices are down near $85.10, and gold prices are slightly lower to $1667.

The VIX isn't falling today, and is hovering near the 33.25 level. Yesterday it broke below its 50-day average for the first time in months, which is a good sign. But I would have thought if traders really think the market has more upside in store that it would have moved even lower. I would like to see it get below the 30 level to signal an expected decrease in all of this volatility that we have seen.

As for the 10-year yield, the bond market was closed yesterday but yields are on the rise today. You can see below that the yield on the 10-yr. is breaking above its 50-day average. While higher bond yields are not theoretically good for the market, I like to see the 10-yr lift a little from its recent depressing levels simply to signify that the economy isn't about to fall off a cliff.

Trading comment: We sold some of our trading index shorts yesterday as the market appeared to break out of its slump. Investor sentiment has become extremely bearish, with many of the indicators we follow at levels not seen since 2008. Even though I don't think we have seen the ultimate lows in the market for this cycle, I am aware of the fact that there can be interim trading rallies along the way. If we don't get hit with further unexpected bad news out of Europe, and no big earnings disappointments, I could see this market continue to lift a little higher while some of the recent bearish sentiment gets unwound. Stick and move, baby.

Monday, October 10, 2011

Monday Morning Musings

After a 2% weekly gain last week, the markets are up sharply in early trading this morning. The news over the weekend was that both Merkel and Sarkozy have committed to supporting the region's banking system through some sort of recapitalization plan to be unveiled in a few weeks.

Although Asia's markets were roughly flat overnight, Europe is rallying this morning. The euro is also getting a boost at the expense of the dollar. China was closed all last week for holidays and re-opened with a -0.6% loss last night.

Commodities are rallying, with gold prices higher to $1667 and oil prices up near $86.

All 10 S&P sectors are higher today, led by energy and financials. Defensive sectors like consumer staples and utilities are lagging.

The bond market is closed for Columbus Day today.

Trading comment: A notable development on the technical front is the S&P 500 breaking above its overhead 50-day average for the first time since July. Lots of traders like to lean short on stocks when the market is below this key moving average. While one day doesn't necessarily change the trend, it is a good start. And a couple consecutive closes above the 50-day could spur additional short-covering. The SPX has been down for 5 straight months, so a relief rally certainly isn't out of the question.

Earnings season will start to pick up soon, and will be a key ingredient. Stocks have already priced in a lot of negativity, and in my opinion have priced in a decline in corporate profits going forward. If we can get some solid reports and forward guidance from managements that is less bearish than many already fear, I think that could be enough to add to this nascent rally.

still long SH

Thursday, October 06, 2011

No Rate Cut From The ECB

Despite the hopes in the market that the ECB would cut rates as his last measure before leaving office, ECB President Trichet held rates steady at 1.50%, well above our fed funds rate here in the U.S. Trichet said that this rate remains appropriate, but that the ECB would conduct two longer-term lending programs. He also added that countries should move to recapitalize their banks.

As for the Bank of England, they too held rates at 0.50%, but increased their asset purchase program by an additional 75 billion pounds. The European markets rallied this morning, and helped improve sentiment before the open here in the US. Asian markets also rallied overnight, led by a +5.7% surge in Hong Kong.

In corporate news, we saw a wave of same-store sales reports by retailers this morning, and most of the stocks in the group are trading higher. The retail etf (XRT) is up +1.4% after an hour of trading so far today.

The dollar is lower today, helping to boost commodities. Oil prices are higher near $80.50, while gold prices are up a tad to $1645.

The 10-year is getting a nice bounce to 1.95%, despite Operation Twist. And the VIX is down another percent to 37.20. A test of its 50-day support is coming very soon. The VIX has not traded below its 50-day average since July 22nd, so this would be a notable event if it occurred.

Trading comment: The market is enjoying a third day of a bounce from its spike down to new lows on Monday. Tomorrow is the big monthly jobs report, which often adds to volatility in the market. I am considering adding back to our index hedges that we took profits on last week. While this bounce has been nice, it is still too early to declare that the market trend has changed from down to up. That could still happen in the near-term, but I think we would need to see some more consolidation and constructive action first.

Wednesday, October 05, 2011

Is Europe Considering "Le-TARP"?

The markets started out down a bit, but have since rallied back into positive territory. Yesterday's late day rally was quite impressive, and if the bulls can hold the line here, we could see additional short-covering add to those gains.

Although Asian markets were mixed overnight, Europe has rallied strongly this morning. The improved tone in Europe comes amid chatter that officials are considering ways to recapitalize the banks in the region. Le-TARP, anyone?

Last night, Moody's downgraded the debt rating for Italy, but it appears that this move was already baked in the cake.

In economic news, this morning's ADP Employment report showed that private payrolls increased by 91,000 in September, far better than the 45,000 consensus estimate. Also, the ISM Services index for September came in at 53.0, which is just slightly below August's reading of 53.3. The reading above 50 still represents expansion for the sector.

Commodities are mostly higher today, except for precious metals. Oil has rallied back to $78.50, while gold prices are just slightly down near $1614.

The 10-year yield is getting a boost to 1.88%; and the VIX has continued to mover lower after a dramatic reversal yesterday. The VIX is down another -4% today to 39.20, which is still a very high level but not as dramatic as the 45-46 readings experienced yesterday.

Trading comment: Yesterday we took profits on some of our index etf hedges, but we have not gone so far as to add to our long positions as of yet. I would like to see the market hold some support levels and prove that yesterday wasn't just a one-day wonder. The market remains heavily oversold, with recent bearish sentiment indicators at extreme levels. This does provide a good setup for a continuation rally, but sentiment readings are secondary indicators. We need to see strong price/volume action as our primary indicator.

Tuesday, October 04, 2011

Groundhog Day or Turnaround Tuesday?

The market is lower again in early trading on no new news, but rather a continuation of concerns out of Europe. It feels like Groundhog Day, with each day playing out surrounding the same news event. Speculation over a Greek default remains high and eurozone officials have said that they will delay disbursement of aid to Greece.

There is no real economic or corporate news this morning to account for the amount of selling pressure we saw in the first hour. Some of it is technical selling after the SPX broke below the 1100 support level that has held since early August.

Asian markets were lower overnight, and Europe is down again today as well. Commodities are also lower, with oil prices down near $77.20 and gold prices lower to $1640.

The 10-year yield was lower in the first hour but has since bounced a tad to 1.80%. Ditto for the VIX which opened higher but has since reversed into the red to a still high 44.72.

Trading comment: Today could either be another groundhog day or it could be a 'turnaround tuesday'. The Russell 2000 was the first index to buck the selling and go green. Then the Nasdaq followed suit and turned positive. As yet, the S&P is still struggling to get out of negative territory. With the market down quite a bit in the last 4 days, we have taken partial profit on one of our index etf hedges. Sentiment is hitting extreme bearish levels, and a bounce seems likely in the near-term. While we are still positioned defensively, we like to trade around our hedges from time to time.

less long RWM

Monday, October 03, 2011

Monday Morning Musings

The song remains the same this morning, with concerns out of Europe weighing on our markets and volatility remaining elevated near extreme levels.

Overnight, China surprised with an improved PMI reading at 51.2 (from 50.9) for September. China's markets were closed, but the news did little to boost sentiment in Hong Kong where their market fell -4.4%.

In Europe, news that Greece does not expect to hit its deficit target has caused another wave of selling in Europe.

The flight-to-safety trade is on this morning, with gains in the usual suspects. The dollar has attracted some buying and is higher, Treasuries are higher, and gold prices are rallying as well. The gains in bonds have pushed the 10-year yield back down to 1.87%. And gold prices have topped $1657. But oil prices are lower so far, down near $77.40.

Our latest ISM reading also came in better-than-expected at 51.6 vs. 50.6 in August. That helped spark some buying and reversed the early losses in the market and pushed stocks into positive territory.

The VIX remains extremely elevated near the 42.0 level.

Trading comment: Investors are happy to put Q3 behind them. Now hopes turn to the month of October which has been know to accompany more than a few market bottoms in history. The graph below shows how again this morning the SPX came down to test the 1120 level. That level has market support since early August, but as you can see we are now testing that support for roughly the fourth time. My worry is that these levels can only hold a few times and eventually will give way. The silver lining of that scenario is that could be a setup for a trading bottom as well. I would like to see the 1120 level broken but then quickly recovered. Sentiment is very bearish at this juncture, and there could be plenty of short-covering to help push the market higher.